The impact of political instability on a fragile tourism product

The impact of political instability on a fragile tourism product

Tourism Management, Vol. 19, No. 3, pp. 283-288, 1998 © 1998 Elscvicr Scicncc Ltd. All rights rcscrvcd Printed in Grcat Britain 0261-5177/98 $19.0(I+ ...

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Tourism Management, Vol. 19, No. 3, pp. 283-288, 1998 © 1998 Elscvicr Scicncc Ltd. All rights rcscrvcd Printed in Grcat Britain 0261-5177/98 $19.0(I+ ().1}()

Pergamon PIh S0261-5177(98}00012-0

Case Study

The impact of political instability on a fragile tourism product M A Clements* Staffordshire University Business School, Leek Road, Stoke-on-Trent, Staffordshire ST4 2DF, UK

A Georgiou PA College, Larnaca, Cyprus The Eastern Mediterranean and Aegean Sea are not the first areas to find themselves engulfed in a political situation which threatens economies so reliant upon tourism and foreign currency receipts. Recent examples along the coast of North Africa and former Yugoslavia for instance show how foreign tourism can be all but obliterated by political instability and civil upheaval. The on-going dispute between the two partitioned communities on the island of Cyprus threatens not only a tourism destination already suffering from increased competition and quality problems, but also the neighbouring countries Greece and Turkey who rely upon tourism to contribute to their economies. Downturns in these economies can only exacerbate the problems in a vicious circle. The reader is introduced to the more recent causes and the threats occurring in the area. © 1998 Elsevier Science Ltd. All rights reserved.

product at the epicentre of the problem, in Cyprus. The decision by the Cypriot Government (due to intense international diplomatic pressure) to consider delaying the deployment of these missiles for up to 18 months has done little to diffuse the issue, or to take events out of the international media. Turkey has responded by dismissing the decision as a 'gesture, a fabricated solution'.' A spokesperson for the Turkish Foreign Ministry has stated that Turkey will press on with its 'decisive stance' for as long as the Cypriot Government insists on the right to deploy these missiles, which Turkey believes not only threaten mainland Turkey, but also its current air supremacy which it sees as vital to maintaining the current balance of power in the areaF Cyprus is already recognized as being one of the most hcavily armed areas in the world. The S-300 missile issue is causing an already delicate political situation in the Aegean to escalate. In January 1996 (the Kordak/Imia incident), the dispute over sovereignty of the islands and inlets and 12 mile territorial waters, between Greece and Turkey, came close to a causing a full armed conflict. More recent developments (May 1997)

The announcement by the Cypriot Government at the beginning of 1997 that it was considering installing Russian-made S-300 surface-to-air missiles as part of a response to growing tension between the two communities (Greek-Cypriot and TurkishCypriot) on the island has not only further destabilized the political arena in the Aegean and Eastern Mediterranean affecting the foreign policies of Russia,t USA:~ and the EC, but is also believed to be influencing adversely an already fragile tourism *Corresponding author. +Yevgeni Primakov (Russian Foreign Minister) in Washington informed the US Government that the S-300 missiles would be delivered to Cyprus unless there was an agreement on the complete demilitarization of the island, including all Turkish troops (estimated to be around 35000) 17 June 1997. $'(Congress not only) reaffirms its view that the status quo on Cyprus is unacceptable and detrimental to the interests of the United States in the Eastern Mediterranean and beyond... (but) considers lasting peace and stability on Cyprus could be best served by a process of complete demilitarization leading to the withdrawal of all toreign occupation troops' Congressman Ben Gilman (Chmn US House International Relations Committee introducing House Concurrent Resolution #81 15 May 1997..


The impact of pofitical instability on a fragile tourism product: M A Clements and A Georgiou

have done nothing to diffuse the delicate political situation in the Eastern Mediterranean and Aegean Sea area. Greece has accused Turkey of publishing a map which depicts the islands of Crete and Cyprus as belonging to Turkey. Papers from the Turkish Military Academy dispute a score of Greek islets and isles in the Aegean and Argosaronic Sea waters, which coincides with major military manoeuvres by over 11000 Turkish troops, warships and fighter aircraft in this disputed area. The Cyprus problem is impossible to separate from the more long-running Greece-Turkey drama, as the map incident underlines. This is underscored by the recent quote from Rauf Denktash, the Leader of the Turkish-Cypriot community in Cyprus: Cyprus can never be Greek, this is our march. Neither 65 million Turks nor the Turkish Cypriots will allow this...Turkey will not leave Cyprus...had (there) not been a single Turk in Cyprus, again the balance established by the Treaty of Lausanne between Greece and Turkey would not have allowed (it) to be titled. Otherwise the southern shores would have been closed by Greek islands...(this is) why Turkish leaders say we have a Cyprus cause, even if you (Turkish Cypriots) were not there' Although the political relationship between mainland Greece and the Greek-speaking community on Cyprus has not always been harmonious, the current position has been for Greece to align itself with the aspirations of the Greek-Cypriots just as mainland Turkey has with the Turkish-Cypriots. Against this deteriorating political backdrop there exists a tourism industry which is seen as vital to all the countries involved. Turkey, though a relatively late entrant into the mass tourism market, is enjoying a boom with nearly 8 million foreign tourists in 1996 (a 60% increase over 1995), representing nearly $6 billion in foreign revenue. Any serious disruption to this revenue source would have major consequences for a country attempting to modernize for consideration of entry into the EC. Likewise, Greek tourism has been suffering a downturn in visitor numbers in recent years and has an economy currently plagued by local disputes with farmers, seaman and air transport, which receive regular international coverage in the world's media. The Greek Institute of Tourist Research and Forecasts (ITEP) has forecast a significant recovery of some 8-10% in 1997, but it needs stability in the area to achieve this. Then there is the state of tourism on the island of Cyprus itself.

Developments in foreign tourism in the Republic of Cyprus Since independence in 1960, tourism in Cyprus has been the major economic activity on the island. Although the invasion of Turkey in 1973/74 seriously disrupted tourism, the number of visitors to the 284

T o u r i s t V i s i t o r s to C y p r u s R e p u b l i c

2000000 1500000 1000000 500000 0 60 73 75 79 81 84 88 89 90 91 92 93 94 95 96



Figure 1 Tourism growth (Republic of Cyprus),

island (albeit to the southern Republic of Cyprus) has grown year-on-year since the 1980s (Figure 1) 4 with the exception of 1990/91 when it was adversely affected by the (Persian) Gulf War. The tourism industry has become the largest export industry, the largest source of foreign income. The health of the tourist sector significantly influences the rate of growth of the economy through the links it has with the other sectors of the economy, in particular agriculture, manufacturing, construction, banking and transport as well as trade and communications? Estimates of the value of the tourism product for 1995 were $1.62 billion (US), which is almost 20% of the Gross Domestic Product. There are signs, however, that the tourism product is no longer capable of sustaining its previous wealth-creating properties. One major source of tourist throughout this growth period was from the UK. By 1992 UK visitors were accounting for around 50% of all tourists, that is nearly 1 million visitors per year. As a direct response to this arrival pattern, tourism evolved around its customer base; returnees yearon-year were not uncommon. The number of UK visitors has fallen significantly since 1992; in 1994 the percentage had fallen to 38% and to 31% in 1996. The official explanation has been that the UK segment had been effected by a series of reasons": (1) Increasing competition from other Mediterranean countries and the Pacific islands (2) Recession in the UK (3) The bankruptcy of one of the biggest tour operators which sent tourists to Cyprus (Cypriana) which left much greater bargaining power in the hands of the remaining major UK tour operators 7 Lunn Poly's research suggests that in an overall fall of some 10% in overseas UK tourism during

The impact of political instability on a fragile tourism product." M A Clements and A Georgiou

1996, destinations such as Cyprus and the G r e e k Islands were particularly hard hit? But this analysis of the situation is considered to mask a number of underlying reasons which require explanation. One local analyst believes that the British are no longer coming because of a combination of factors, namely: (1) High prices/Currency Exchange Rates (2) Bad service (3) Over-development in tourism areas" These more fundamental criticisms at the local level suggest that an upturn in the UK economy alone will not provide a corrective mechanism to ensure that the U K tourists will return. The spend per capita of U K tourists has declined since 1993 as the cost of a holiday in Cyprus has risen (Figure 2). The mid-months of 1997 saw the Sterling-Cyprus pound exchange rate as favourable for the U K tourist as it had been for some considerable time, but this came too late to influence many tourists who had already booked their annual holidays for 1997. The determination of the new Labour Governmcnt (or rather the now 'independent' Bank of England) to use interest rates as major part of economic policy, suggests that corrective action is foreseeable and that the favourable exchange rate benefits to the U K tourist are likely 1o be pegged back if they continue to influence major (UK) exporters, which, in turn, will reduce what favourable impact there might have been on package tour brochure prices for 1998. The reaction to the loss of the U K market has been to look to increasing the number of tourist arrivals from Eastern Europe. Numbers of arrivals have increased significantly since 1994 when they were so small as to register 'insignificant'; in 1995 they were 97403 and 1996 were nearly 125000.'" The current visitors from Eastern Europe show a much higher per capita spend than any other visitor

Average per person Spend 500 T


400 ~300 +









Russian visitors ALL








Figure 3 Averageper person spend (Russian visitor). group to the island (Figure 3) and they have provided a boost to the tourism industry, but there are signs that parts of the economy are feeling the effects of a slowing in total numbers of visitors. Some sectors, such as agriculture, mining and manufacture, show volatile percentage changes with disruptive consequences to the economy (Figure 4). In the construction sector, authorized building permits, which give an indication of future construction activity, are known to be significantly dowW' although over the previous 3 year period the number of available licensed (tourism) beds had increased from 76000 (1994), to 78000 (1995) to 84500 in 1996, with a further 2860 under still under construction. lz Such a building programme did not reflect the tourism demand pattern and with a similar growth in unlicensed accommodation for which little central control is exercised, excess bed capacity became inevitable. Falling occupancy rates and pressures on prices are making hotels and other

Average per person Spend Production by Economic

400 15 o 10 5 0 -5 -10

350 e~

~. 300





94/95 year-on-year


250 Agriculture

200 1990

t I t I ( t 1991 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1996 UK visitors

Figure 2



A v e r a g e p e r p e r s o n s p e n d ( U K visitor).





Mining Manufacturing





Figure 4

Economic sector indicators (Republic of Cyprus).


The impact of political instability on a fi'agih" tourism product: M A Clements and A Georgiou

Table 1




1994 1995


Cyprus Airways (3210) (3934) 6114 3806 CCC Tourist Enterprises (1548) (1313) (154) (382) Lordos Hotels 151 (237) (149) (2411 Leptos Calypso Hotels nil (2837) 51 11 Astarti Development (649) (633) (3) (202) Cyprus Tourism Dvpt 622 812 535 266 Dome Investments 146 (1851 (101) (22) Amathus Navigation 316 (462) (1022) 31 Claridge Investments n/a (1419) (866) (280) Agros 75 17 (37) (40) Drooshia Heights n/a n/a n/a 211

(2332) (805) (658) (697) (395) (519) (252) 49 116 (72) 7

Values are shown in 00(I Cypriot pounds given in parentheses.

negative values are

providers insolvent? 3 This can be illustrated by considering the earnings of the major public companies operating in the tourism sector (figures available to year-end 1996); shown as Table 1. '4 Many hotels are known to be operating on very low annual occupancy rates, between 50 and 60%. The average low season (November-April) occupancy rate in the region of Paralimni is below 25%. As a result hotels are demanding fewer products and services from the local community and less labour. Some hotels have enacted significant price cuts to attract more business and to improve immediate cash flow. Others are watching this strategy but it is believed that a downward price spiral will adversely effect both levels of service and perceived quality of the tourism product. Michaelides believes that this will produce a "customer who has no respect for the destination and a host who has no respect for the holidaymaker". '~ Cheaper holidays are considered to equate with lower per capita spend tourists. There is already evidence that the average per capita spend is declining (Figure 2), which strikes at the very core of CTO strategy which is, according to its Director, Ms Phryne Michael, "to increase the amount of money which visitors spend in Cyprus". '~' A parallel development has been the uncontrolled growth in tourism-related retail outlets such as souvenir shops and restaurants. According to Skyrianides 17 "anybody can come along and open a 2CYP kebab stall outside your door..." reflecting the ease of starting up a retail business where no planning permission is needed. The opening of MacDonalds first branch in Cyprus, in Larnaca, for example, has seriously effected other local fast food outlets; its professionalism and marketing activities are proving too much for the opposition. Loan arrears in the tourism sector are rising faster than any other business sector according to the Bank of Cyprus, the island's main lending institution. As at 23 February 1997, hoteliers and tourist developer companies owed some 400 million CYP to the island's banks, including arrears of 80 million CYp. According to Militsa Drakou (Cyprus 286

Development Bank) most of the hoteliers' income is delayed by the tour operators. '~ But problems of cash flow are not the only problem, another concerns the the weak short-term liquidity of businesses in the tourism sector. The current liabilities of most tourism businesses are well in excess of their current assets. The implication of this is that these businesses do not have the short-term assets needed to meet their short-term obligations. As a result payments to their creditors are delayed, whose obligations elsewhere are similarly affected producing a multiplier effect throughout the economy. Because of the visible cash problems in the tourism sector, tourism businesses are finding it increasingly difficult to raise money in order to improve the product, where profits (and profit projections) are insufficient to meet the interest payments. This is particularly so for the many smaller private companies who cannot raise finance by rights issues, but even the island's public companies cannot present a favourable opportunity to the would-be investor. Without the necessary funds for improvements a further downward spiral is in place, where declining standards and quality are inevitable. The Cyprus Tourism Organization (Republic of Cyprus) has reacted positively by suspending for 3 years its 3% CTO levy (tax) as part of its response to reducing the cost of a stay on the island. The impression given of this action is that it is too little and too late. Generally prices remain high in restaurants and hotels because, it is claimed, that rents and rates remain high to fund problems elsewhere within the economy. Advocates of change call for more positive measures such as tougher (and enforced) controls on hotel development and new beds, low interest loans for upgrading hotels and the controlling of the industry's cost structure, in particular wage costs which are the largest single component. Local business interests are already critical of its failure to arrest the general downward trend of visitors; "we believe that compared to international standards, the amount of money spent for marketing is not enough...internationally around 3% of revenues earned by tourism is re-invested in marketing...whereas it is less than 1.5% by the C T O " . " Furthermore there is a view expressed that not enough is done to work in harmony with the tour operators; Savvides believes that the tour operators are "unnecessarily presented with obstacles and serious disincentives in marketing the Cyprus product". >

Tourism and the political situation in Southern (Republic) Cyprus There has been a continued state of hostility between the two partitioned communities, GreekCypriot and Turkish-Cypriot, sincc the Turkish

The impact o]political instability on a fragile tourism product: M A Ch,ments and A Georgiou

invasion in 1974, when some 37% of the northern part of the island remained under Turkish occupation. This hostility has been especially in those areas adjacent to the Green L i n e (the border guaranteed and maintained by the UN.Zl). Towards the end of 1996 this hostility increased in intensity with the deaths of several protestors. This attracted worldwide press and TV coverage, thereby 'de-localizing' the situation. Since then, political rhetoric has increased from both local governments, which has embraced the wider international community. Statements from international politicians gain wide press and prime time TV news exposure. Bookings for 1997 were, by mid-January, believed to have been affected by those events shown in the world media. The effects of political/social crises on the island have been witnessed on two occasions before, between 1974/75 after the Turkish invasion and in 199(i)/91 during the Gulf Crisis, when Cyprus was used as forward position for attacking lraq. The most affected regions are those nearest to the flashpoints along the Green Line; areas such as Ayia Napa and Paralimni, who were already experiencing declining tourist numbers before these more rccent events. For its part the CTO does recognize that there is a credibility problem created by the images of the island being portrayed around the world. Its cause is not aided by widely reported comments from politicians - - "(the situation in Cyprus) will explode if it does not get any better.., there is peace, but there is also great risk of an explosion" (Holbrooke). 22 There are plans to engage the services of PR companies based in major tourist departure countries to help dispel the images being portrayed and to bring major tour operators to Cyprus to witness at first hand that the tourist is not entering a 'war-zone'. There are plans by the CTO to support and provide incentives for specialist tour operators dedicated towards promoting Cyprus.

Turkish Republic of Northern Cyprus (TRNC) The impact on the Northern Cyprus tourism industry has been even more devastating. Inflation in the first 5 months of 1997 was estimated to be running at around 34%. 23 One local source estimates that visitors to Northern Cyprus fell from over 520000 in 1995 to 497000 in 1996; this included a worrying 21% fall in foreign tourists (i.e. other than visitors from mainland Turkey) because of 'the incidents during the summer'. 2~ Also day excursionists across the Green L i n e from the Republic have declined from 60000 to 20000 in the same period£ ~ Since 1974, owing to international condemnation of the act of invasion by Turkey, the occupied northern area of the island has been an effective no-go area for mass tourism, even though it possesses some of

the finest beaches on the island. It is only in recent years that a tourism industry of any note has been established. Much of the infrastructure required to deliver and maintain a quality tourism product requires significant investment. In January 1997, Turkey introduced a plan to provide Northern Cyprus with a $200 million credit deal to prepare the way for sweeping structural changes to improve the economy. The Turkish President, Suleiman Demirel, sees the problem for the Turkish-Cypriot not so much as the missiles themselves, but rather the survival of the local economy. He says that there are no adequate supplies of water or electricity, without which there is the very real threat of agriculture and the rest of the private sector of the economy disappearing. The paradox being, however, that the act of investing in Northern Cyprus by Turkey is perceived by the Greek-Cypriot community as being an act of 'permanency', which is counter to their long-term aspirations of a reunified island as well as providing still more competition in a saturated market. The TRNC's decision, in the face of protests from the Republic to the United Nations, to sell-off two previously Greek-owned hotels confiscated by the Turks during the 1974 invasion as a way of kickstarting its dormant tourism industry has inflamed the situation. Part of the ongoing dialogue/dispute between the two communities is to recognize adequate reparations for assets taken from each other during previous armed disputes; this disposal of these (tourism) assets sends more than merely an economic signal to the Greek-Cypriot community.

Tourism planning in a state of political uncertainty It is evident that the tourism product in Cyprus is in need of reappraisal in terms of market position. This can be best achieved within a stable political and economic environment. An unstable political environment threatens not only the tourism product on Cyprus but also those neighbouring countries, Greece and Turkey, who find themselves politically and culturally aligned with the two communities. Talks between the two communities on the island took place at Troutbeck, New York, in mid-July 1997. These were the first such talks between the two communities since President Cleridcs (Republic) and Mr Denktash (TRNC) met informally in Nicosia in October 1994. Even before both sides had sat down to talk, they were accusing the other of being intransigent, unbending and unwilling to come constructively to the negotiating table. Mr Denktash was been quoted as saying "As far as I am concerned, if nothing is achieved during this round of talks then we have to decide the conditions for sitting around the negotiations table again...we have no time for another 34 years to row against the 287

The impact of political instabili O' on a fragile tourism product: M A Clements and A Geolgiou

current. We have to tell them (the international community) we are not in the game if you continue to consider the Greeks (Cypriots) as the government of Cyprus". > Those talks in New York ended without agreement except for a decision to meet

again, this time in Glion, near Montreux in Switzerland in August. These talks also ended in acrimony, with the TRNC declaring that it would not participate in any further talks unless the Republic withdraw its application to join the EC in early 1998. There are no further talks planned. History on the island has shown that during and after periods of political instability, the Turkish invasion (1974), the Gulf Conflict (1990/91), there is an adverse effect on the number of foreign visitors. Given the fragile state of the tourism product in 1997, a repeat of any serious conflict could push the tourism industry on the island, both north and south, into a serious downward spiral at a time when competing destinations in the Mediterranean are busy developing their tourism products, e,

Acknowledgements The authors acknowledge the help and support given to them by PA College (Cyprus) and other colleagues currently involved in a series of studies of Eastern Mediterranean tourism developments and trends. The comments made, however, are attributable to the authors alone.

References 1. Omer Akbel Turkish Foreign Ministry reported by the Macedonian Press Agency. 17 January 1997. 2. Cumhuriyet (newspaper) 23 March 1997, p. 5 and (TRNC) Bavrak Radio 24 March 1997. 3. R. Denktesh inKibris (newspaper) 17 June 1997, p. 1. 4. Sources: CTO Statistics and A. Andronikou, Development o/' Tourism in Cyprus. Harmonization of Tourism with the Environment, Cosmos Ltd, Cyprus 1986, p. 23. 5. The Tourist lndustry in Cyprus, Bank of Cyprus Bulletin, No. 1, 1996, p. 2.


6. The Tourist Industry in Cyprus Bank of Cyprus Bulletin, No. 1, 1996, p. 7. 7. G. C. Michaelides, Tourists: They've changed and so must wc Hermes International, Winter 1996/97, p. 12. 8. 'Greek Islands lose out', Daily Mail, 5 October 1996, p. 56: Lunn Poly estimates that some 1 million holidays abroad, representing 10% of the total, were lost between 1995 and 1996; major gainers included Turkey and major losers included the Greek Islands and Cyprus. 9. N. Josephides, The l&lue q/' the British Tourist, Conference held in Limassol, 5 July 1996. 10. CTO Statistics. 11. Tire Tourist Industry in Oprus, Bank of Cyprus Bulletin, No. 1, 1996, p. 16. 12. J. Christou, Hotels face cash crisis with debt of millions to banks, ()prus Mail, 23 February 1997, p. 5. 13. A. Martin, Never too late: Why action plan must be just that, Hermes International, Autumn 1996. 14. Sources: Qvpms Financial Min'or, 15 August 1993, p. 9; C)'prus Financial Mirror, 23 February 1994, p. 11; C)7~ms Financial Mirlvr, 15 February 1995, p. 21; Cyprus Financial Mirror, 11 October 1995, p. 10; C)7~rus Financial Mirror', 5 November 1996, p. 33; Cyprus Financial Mirror, 24 January 1997, p. 33; Cyprus Financial Mirror, 18 June 1997, p. 23. 15. Op tit, G. C. Michaelides. 16. T. Anastasiadcs, Added Value the key to a quality future Hermes International, Winter 1995/96, p. 10. 17. A. Skyrianidcs, The view from the pines of Platrcs, C)7,'us Mail. 16 February 1997, p. 4. 18. J. Christou, Newest hotels have the worst cash problems, Cyprus Mail, 23 February, 1997, p. 8. 19. Op tit, Z. Ioannides. 2(1. S. Savvides, Competitiveness: The missing factor in the development of tourism in Cyprus, Accountan O, C)prus, Vol. 45, December 1996, p. 5. 21. The UNFICYP is the longest UN peace operation, established in 1964; a 1200 force patrols the 180 km buffer zone known as the Green Line. 22. Taken from the text of a speech delivered by Richard Holbrooke, US Presidential Emissary, to the world press in Nicosia, 12 June 1997. Richard Holbrooke is responsible for bringing the two communities to the negotiating table planned in New York early July 1997. 23. Kibris, 1"8 June 1997, p. 1. 24. Kibris, 3 February 1997, p. 1. 25. S. Denktash (Deputy Prime Minister, TRNC) commenting in the Turkish Daily News, 4 July 1997. 26. Kibris, 17 June 1997, p. 3. 27. B. Jones, Spain gears up for tourists, Europe, No. 378, July/ August 1996, pp. 39-40.